Phison's 2021 fourth quarter earnings call. This is Jack Chen from CT Semiconductor team, serving as host today. Today we feel honored to invite Phison's CEO, Khein-Seng Pua, to join the meeting. For today's agenda, we'll first begin with the fourth quarter 2021 results update and business outlook, and then enter Q&A session. As a reminder, this meeting will end at 4:30 P.M. Right now, I would like to turn the call to CEO Pua. Mr. Pua, please go ahead.
Thanks to Jack Chen from CT. Yes, we have Phison's 2021 four quarters financial report update. I think we all agree 5G is going to trigger more NAND application, and we can see a lot of new storage keep asking for higher capacity. This is. I believe Phison we are in a very good position because we almost cover every kind of application, provide the controller IP, the full system and the full turnkey. Many years, a lot of investors keep saying Phison is a consumer-related company. I'd like to use this chart of Phison 21 years history to explain to you. At least at this moment, Phison we are far away skipping away from the consumer business.
The first 10 years, Phison, we developed the first USB SoC for the we named it a pen drive. This is a totally new market, and Phison, we are one of the key players. From nothing to $1 billion, we make it within 10 years. First, we started to migrate to the embedded system triggered by Apple in 2007. Phison, we tried to get this business, but unfortunately we are not able to make it because we don't have a good relationship, we don't have any good channel to talk to those key player. In 2010 and 2015, in this six years, we are stuck in the consumer business. During that time, if saying Phison is a consumer-related company, we agree.
During that period, Phison, we start to have a heavy investment into the R&D activity. We built a lot of fundamental IP and a lot of system integrations. By 2018, the opportunity we work with the AMD, we are successfully to bring up the PCIe Gen4 SSD within nine months, which is launching by 2019, July 7th. With that products launching, we successful attract a lot of tier one system maker recognize Phison are capable in this high-end controller system development. We achieve a lot of new program from either semiconductor company, NAND manufacturers, system builder, asking Phison to corporate develop the new products to them. We can see Phison will be growth after 2019. The reason is everything coming from heavy R&D investment.
Phison today, we cover most likely every application, the segment which needs a lot of NAND flash storage. This is a breakdown about our last year four quarters revenue. You can see there our controller the portion by dollar amount, by percentage is an all-time high. We grow a lot in controller business just because we gain many controller projects from the semicon. I still believe by 2022, Phison will still be able to grow rapidly in the controller business with dollar amount and also the percentage, I believe we're able to increase. You can see the consumer business is down to almost 20%. This fully follows our expectations. The so-called embedded ODM, we start to enable this business from the 2021.
Now growth rapidly, and I believe this will be our major, cash cow and also generate a lot of relationship with the system makers. This embedded ODM modules which cover the, mobile phone, PC, server, automotive. We believe Phison, with our consistent heavy R&D investment, we're able to gain more business. I wish the shareholder, the fund manager, investor, you can recognize Phison, we are not as a consumer-related company anymore. We are the so-called technology company. The revenue by fourth quarter last year is TWD 16.8 billion, we announced already, and the gross profit is TWD 4.7 billion. The gross profit we grow for 61% YOY, and the record high in the same period in the Q4.
Last year, Phison actually we hit the revenue in the all-time high, which is TWD 62.5 billion. Some highlight here, controller is a record high with the dollar amount and also the portion, 35%. The PCIe controller, every quarter we keep rapidly growing because of we are pioneer, and also we gain a few more semicon projects. We also design with a lot of our modules into customization and embedded ODM to the system makers. We expect by this year, controller is going to grow in our revenue. The PCIe controller, we also able to gain market share. By modules, I need to highlight about the so-called BGA SSD. This was triggered by Intel many years ago, but looks like the market didn't take it.
Last year, we make this into the smartphone, Chromebook, automotive, and some industrial motherboard. We also put this to Mars. If you read the news that NASA has one, the Perseverance rover on Mars, which is using Phison BGA SSD. Next year, Phison will also work with our system partners. We are going to ramp up a lot on the BGA SSD into the computing business. We are expecting 2023, this will become one of our major business. Embedded ODM is already almost a 2x growth versus YOY. By 2022, this will become our biggest business. The overall revenue is at TWD 62.5 billion. The gross margin Q4 is at 28.4%.
Shareholder may ask, "What happened?" Remember last year Q3, analysts saying, "Oh, the memory business is going to the winter, demand is this, blah, blah." Anyway, we not agree. Last year CQ4, Phison, we are strategically to increase our inventory. The reason is we got so many design win and forecast from the embedded ODM customers, which we need to start to ship by CQ1, CQ2 next year. Personally, I believe every time go to the CQ2, NAND manufacturer, they will prioritize their NAND supply to the main system makers such as phone makers, PC makers, server makers. At that time, Phison will be in the lower priority to gain their NAND supply. When market going slow down, that is our best timing to increase our inventory, so we make it happen.
Follow the so-called financial rule, their so-called LCM. Definition of LCM is here. We have to write off some inventory. Actually this is not lost, okay? This is just moved to prepare for next. You can see by Q1 next year, actually the market price is bounced back. Those write-off already is moving back to our finance report by this Q1. I don't much worry about this. In the future, Phison is going to grow more business and definitely we are going to increase inventory, especially in the slow season. This kind of story may happen again. I think this is our strategy to build inventory than to grow ourselves. I don't have any concern on this, and I wish you also agree to my point.
The earnings per share is EPS is NTD 9.19, and also this is our all-time high in Q4. Okay? Versus, I believe, this is one of our good performance compared with last year. You can see last year we have the disposal of our Hefei entity. We gain extra 12 EPS, but this year, this is everything coming from our business. Income statement, you may be more concerned in the our EPS, but I need to highlight again. Look to our operating expense. Even though the gross margin is gross profit coming down, but we still insist to increase R&D expense. Especially last year, Phison, we increased more than 700 new headcount in engineering. Our cost actually is increasing, okay?
I think this is a trend Phison have to keep investing into the R&D. And the total ROE, I think you may care about more in the ROE. Overall, Phison, I believe by CQ4 we are doing good. Earnings per share, I think we're also happy. The whole year is TWD 41 EPS. Balance sheet, in this you may be concerned about the inventory. By CQ4 2020 is TWD 10 billion in inventory. Since last CQ3, we have a strategy to increase our inventory because we gain so many design win program. By end of last year, it's close to TWD 20 billion in the inventory. By February, we go to almost TWD 22 billion.
The reason is, after Yokkaichi contamination, we already been warning by our customers that we have to make sure we're able to fulfill their requirement by CQ2 and CQ3. We have to try to build our more inventory to fulfill their inquiry, okay? The overall Phison ROE is still we keep over 20%. I think overall, we met a good performance to our shareholders. We also like to announce our February revenue. To be honest, this TWD 5.3 billion revenue is totally out from my expectation and big surprise. February, the working day is only like 60% of January because of Chinese Lunar New Year. We almost YOY grow 45%. The MOM, we only decline single digit. All single digits. Just two months, we hit the TWD 10 billion.
Phison all-time high revenue is up to TWD 17 billion. In this Q1 slow season, we already make it. Okay? You may ask, is it because of your Yokkaichi contamination deferred revenue? The answer is no. It's negative. Actually, by January, February, Phison, we got a lot of demand in the embedded ODM and also controllers. This revenue, to be honest, February is out of my expectation, but overall is very healthy. I believe Yokkaichi contamination will impact to the price in the market will happen only in May. Later, I will explain to you. Storage newsletter website, they award Phison again 2022, the best in the SSD controller. We are in two years to get this award. I still believe by 2023, Phison, with our heavy R&D investment, we will get the award again.
Phison, we hit a very good products in the special PCIe Gen4 high performance. Our customer, they also get the award by the best products by hardware and the PC gamer. We are happy to see this happen. By the way, by Q4, some business highlight here. In the retail business, talking about the Gen4 SSD, you take out the NAND manufacturer brand, almost 85%-90% are coming from Phison. Means Phison, we get the 85%-90% share in the retail, exclude the NAND manufacturers. This is a way we are good, and we are feel happy about this performance. Talking about the OEM, we get the three NAND makers to adopt Phison eMMC and UFS controller, and we start to ship by this Q1.
eMMC is growing rapidly, and UFS also growing very rapidly. Unfortunately, the supply from our factory is still far from enough. We still try to convince our supplier to give more wafer allocation to Phison. This award is by OPPO China. This is the first time we got an award from the mobile phone manufacturers. They especially appreciate Phison in the last four years. We support them a lot in the NAND storage development, supply, and the kind of cooperation. With the award from the phone makers, we're able to have more visibility, better positions, and we believe we are able to get more market share from this industry. We can see more and more the middle low-end phones start to adopt the UFS. Phison, we are invited by Qualcomm and MediaTek to be their AVL partner.
We are now supporting these two chip makers with our UFS to their phone customers. In Chromebook, Phison, we get a very big market share, and we keep adapting and also design the BGA SSD into the Chromebook. We can see the big growth by 2023. We have a big program to work with the system makers and the CPU makers. Gaming-wise, unfortunately, because of material shortage, the game console is not able to increase supply in the market. We can see even though units not growing, the capacity itself, now the majority is going to the 2 TB SSD, which also is helping us a lot in the ASP. In the server application, Phison, we are also awarded for the gaming server. We supply the 2 TB SSD for their gaming server. Mainly it's cloud gaming.
This is also a good achievement. Phison, actually, by next month, we are going to organize a technology day. We are going to announce our enterprise SSD storage strategy with our partners. At that time, we are going to tell you what is our policy, what is our strategy, and what is our marketing position. Industrial is slowly moving. We are one of the key players. We keep developing a lot of customization products into the industrial applications. Recently, they have a new gaming handheld gaming machine, which Phison is a key supplier. Enterprise, by April, we are going to announce more to share more our strategy to you. PCIe Gen5, Phison, we get award by this CES.
It's the best SSD controller in Gen5, and it's going to MP by this Q3. We're also working with the semiconductor, with a few semiconductor and also a few game console makers. Okay, about semiconductor industrial outlook. Yokkaichi contamination, later I will have a chart to explain more to you. Ukrainian and the Russian war impact to Phison is very minor. Phison only like 20%-21.5% of the revenue coming from that area. We are basically okay. The most urgent and important to us is about the fab capacity supply, especially we are getting more inquiry in the 20-nm and 12-nm At this moment, we're still not able to get 100% supply from the customers. On the other hand, our demand keeps increasing. This is happy trouble. Okay.
I need to highlight here, you can see our R&D headcount. We increased almost 700 headcount in one year. I can see by end of 2022, we are going to hit 3,000 R&Ds worldwide. We still invest, you can see rapidly, heavy in the R&D investment. Last year, we hit almost $200 million in R&D expense. This is helping Phison to gain the more trust, confidence from our semiconductor partners. We keep heavy investing. They award us more controller projects. This chart is very important. Phison, we cover almost every storage application systems, which I can name is gaming is a big market, embedded ODM, big business, enterprise, automotive, industrial. Phison is very unique company.
We cover everything from in-house IP, controllers, system integrations, software development, and the full turnkey products. Phison is the only unique company in the world. We are able to doing everything in-house and cover every kind of inquiry from the storage demand. We are the only one. I believe if you agree, then you can value the Phison potential. Okay, this is a brief update about Q4. We also collect some question. Let me finish this question, we can go to online. Our cash dividend, this morning we have a board members meeting. We approved the other NTD 13 . First half January, we already have a NTD 10 dividend to shareholders. Overall is 23, same as last year. Okay.
I think audience a lot of experts, so I just use a simple chart to answer you about the Yokkaichi contamination and what happened. As a normal operation, when the wafer in day one, wafer process may go two to three months. After they go into testing, packaging, then go into system EMS, doing SMT to the phone, to the server, to the SSD. What we get from the public, again, we are getting public information. Based on public information, we made a simulation here. Looks like contamination happened by middle of January. Yesterday, we got the announcement from KIOXIA, they are start to full recovery production by yesterday. Means they may lose five to six weeks production capacity. This production capacity, the wafer output will happen by April to May.
Going to the packaging and the SMT. Actually, the market, the big gap shortage happened by end of May to June, which this season is a EMS most busy season to get material, doing SMT, assembly, and then ship to the market. The real shortage to the factory, to the assembly house will happen by June. Unfortunately, this is the biggest season who are asking more than supply. We have to try to get the more our inventory to fulfill at this period. When the customer looking for more support, we're able to make the fulfillment. Shareholder asking, investor asking, "Hey, is the Phison lucky? Last year build inventory, then Xi'an shut down, took down, then Yokkaichi contamination." I don't know what's the next. I hope, hopefully not happen anymore. Last year, Phison increased the build up inventory is our strategy.
The reason is you look to January, February, Phison revenue, big growth. Last year, we already know we got so many design win business. But when the market going to the hot season, we are not able to get full enough supply in the end. So what we can build inventory is when EMS, they are going to, you know, slow down, semicon asking our help, that is the best timing Phison to build inventory. So by end CQ4, early CQ, CQ1 is the season that Phison to build our inventory. Then we consume by CQ2 and CQ3. So this is not lucky. This just because Phison, we get a lot of design win program. We need to pick up the inventory to support fulfillment to the customers. A lot of shareholders, investors are concerned about the, our gross margin.
As I mentioned in the first page, by 2010 to 2015, we are startup. We are in the consumer business. You can see the gross margin little bit, what I can say, ugly because it's a consumer business. We are slowly migrate to the embedded after 2016. 2019 with the AMD opportunity, we built the drive controller system within nine months. We get a lot of recognition from the tier one partners. They start to award Phison many project. You can see our gross margin is improved very rapidly. We give the kind of a guidance to our shareholders.
We hope our average of gross margin 27% ±3%, which we raise 2%. I believe with our heavy R&D investing and also the more project award from the semicon, and we are going to build more high-value products, we can gradually improve our gross margin. On the other hand, we also wish in our supply chain, our suppliers, our customers, also able to enjoy the profit together. My goal, Phison's goal, at this moment, we are going to increase to focus into our revenue growth. The reason is this market is so big and growing so fast, and Phison looks like we have a very good opportunity to cover every segment. We need to improve, increase our revenue. At the end, we're able to increase in our net profit.
Gross profit, gross margin rate itself, I believe gradually we are able to improve, but most likely I rather prefer to increase revenue and the net profit. This chart is very interesting, okay? This period I keep talking to the investor. In our business they have a unit business and also a capacity business. Unit means every phone, every PC, they need the one storage, means the one controllers. But look to the smartphone. Worldwide consumption is 1.2B, 1.4B. This is not going to 2B. Not impossible going to 2B. PC, 400 million, not going to 500 million. Means controller itself, the growth in the unit is very, very minor. Phison controller business growing a lot just because we take market share. Not means the industry increase the demand, okay? But the...
Fortunately, Phison, we not only cover unit business, but we also cover capacity business. You can see the capacity is going up rapidly. Many years ago, Phison, we are in the USB business. It's a 2 GB, 4 GB, 16 GB. But now we go to the PC client business. It's a 1 TB. Gaming console is a 2 TB, 4 TB. Enterprise is a 16 TB. So we also get the capacity business, which improve our ASP and at the end improve our net profit. If Phison only in the unit business, what I can tell you, the momentum to growth is very, very minor. With the capacity business, I think in coming few years we can grow. 2021, I think we YOY growth is 29%. By January, February, we grow close to the 30+%.
This means Phison, we are on the right strategy and the best approach in this NAND industry. Okay. The Ukraine-Russia war last year is less than 0.5%, so I think we are okay. Investors may also be concerned about the so-called ESG. DJSI by 2020, 41, we grow to 63. MSCI from CCC upgrade to BB. By OTC, 2019, we move to the first ranking. Okay. We keep improving our ESG. Okay? This is my report and my question, so we can go online.
Thank you, Mr. Pua. Right now we are entering Q&A session. If you have any question, please press the Raise Hand button on the menu bar below. Our first question come from Donnie Teng from Nomura. Donnie, please go ahead.
Hi, K.S. Can you hear me?
Yes.
Okay. Thank you so much for your presentation. Just two quick questions. The first one is, it looks like NAND supply is not an issue this year. Just curious, how do you look at the demand side by different applications like server, PC, smartphone, gaming, etc , especially that I think you have increasing your sales contribution from gaming quite significant in the past few years. However, you know that the market have concern on the demand sustainability after the COVID normalize. Wondering if you could give us some outlook from NAND demand perspective. Second question is related to the first one. Considering the demand uncertainties, how should we look at Phison's inventory procurement or depleting strategy maybe into the second half?
Thank you.
Okay. I think this year is not a good year anyway. Xi'an, Samsung took down for two to three weeks. Looks like Yokkaichi lost five to six weeks production. Overall, the gap, the supply gap already happened, so everybody clear about the. I don't believe this gap able to fulfill because equipment is all done. I mean, even though with the full speed production, the loss is a loss, okay? Talking about the demand side, I agree that smartphone, PC by unit I don't see able to grow. Maybe potentially may go down. I mean, may decline. On the other hand, last year the PC bundle SSD is mainly 256 GB. This year already moved to the 512 GB.
Smartphone low end was 32 GB-64 GB, now start moving to 64 GB-128 GB. Even though the unit itself is not improving, but the capacity is increasing. This is also fully follow our strategy, not just only gain in the unit, but also gain in the capacity. On the other hand, when you look to the Phison controller portion, actually by dollar amount, we are increasing every quarter. Thanks to the settle down between Micron UMC, Phison able to get a more wafer supply by this year. This is helping us a lot in our controllers. Also, Phison make a lot of design win with our semiconductor partners to the PCIe Gen4 SSD controller business. This is also helping us. By unit, we growth not because the industry growth, just because we gain market share.
In the capacity side, we gain this business because when market, you know, slow down, we build inventory. Market when go to turn to strong, we have an inventory to back up. This is helping us to gain our ASP and also gain our net profit. Talking about inventory, since Q4 last year, we start to build up our inventory. This is our strategy. My most concern, my most worry is, actually the gap will only happen by end of May and June, July. Follow this chart. Okay. This is the most busy season for the EMS, but the component supply at this period may be in the big tight. So Phison have to make sure we are able to have a good inventory to fulfill our customers' need at the period.
At this moment, any good offer from the semicon in NAND flash, we are going to buy it. We're also asking for more visibility from our customers. We're able to build not only NAND flash for them, but also controllers and also the PMIC IC. So far, PMIC IC is still very tight, but Phison, we are good because we are using our in-house design, and we have a capacity support from UMC. Inventory-wise, our strategy is to keep building up inventory to support our customers' gap in the June-July timeframe.
Okay. Thank you, Pua.
Yeah. Thank you.
Our next question comes from Brian from Credit Suisse. Brian, please go ahead.
Hi, can you hear me?
Yes.
Okay. Thank you for the presentation and very good results. My question was on the Q4. You mentioned there was a write-off which affected your gross margin. Could you just let us know how much the gross margin has been if you did not do the write-off? The second question is, it does seem with NAND tightness, the pricing of NAND might trend upwards going into this year. Is that your sentiment you're getting? Should we see a similar trend this year in terms of gross margin where it tends to trend up alongside the NAND prices?
I don't have a number, how many percent write-off in the Q4, but I believe it's between 1%-2%. Okay? We can see the supplier increase the price by February. The price increase between 15%-20%. Definitely we are going to move back those write-offs into our financial. Means Q1 we gain back this write-off. Will reflect on our Q financial report. Means margin will be turned to good in the Q1. Okay?
Okay.
Yeah.
Should we expect a similar trend this year for margins alongside NAND pricing as shown in the chart? That if NAND pricing continues to increase, we'll see a good margin in volumes as well?
If no more accident, no more earthquake, no more this, no more war, no more this, I believe, 2022, the shape will kind of similar like 2021.
Got it. Could you just share a bit of what's happening on the wafer supply side, and on pricing. What are you seeing right now, and are we getting sufficient supply for this year? Or is there going to be continued tightness? What's your fulfillment rate at this point?
Controller itself, we are tight. 100% tight, okay? We fulfillment only like 60%-65%. Last CQ3, we thought this year we can fulfill 100%, but unfortunately, our customer increased their demand. Controller is at 60%-65%. We hope we're able to get more supply. Talking about NAND flash, you know, right now we are using every NAND manufacturer's NAND. Every. In this world, there are seven manufacturer, okay? We buy NAND flash from these seven manufacturer. Yokkaichi site, in CQ2, we are going to suffer some gap because they are not able to fulfill what we need. Now engineer need to immediately taking other flash to our customers to make the approval to fulfill the shipment by CQ2.
We may have a few weeks not able to fulfill the customers' demand by May because Yokkaichi not able to fulfill what we need. After June, we're able to recover back because we're able to take the flash from Korea, from Singapore, from China to fulfill that kind of a gap. Strategy is very simple, okay? We enable every flash, we enable every kind of applications, and we try to gain every kind of business to make sure we growth in revenue and growth in the net profit. On the other hand, talking about the gross margin, I think you may agree, Phison able to get a more wafer supply from foundry, which controller business is a much higher gross margin, okay? Which is between 50 ± gross margin.
That also helping us to improve our 2022 gross margin.
Thank you.
Yeah.
Okay, our next question come from Simon Wu. Simon, please go ahead.
Okay. Thank you. Can you hear me?
Yes.
Okay, great. Yeah. Thank you, Mr. Pua. Very quickly, yeah, looking at the February monthly revenue, very strong, 35% up year-over-year. Any rough idea how you achieve such a strong year-over-year growth? Sorry, 45% growth year-over-year. You know, half is more price increase or almost, you know, the based on the price increase driven. Thank you.
No, actually, if you may agree since last Q3, analysts saying the memory go into the winter. February, actually the price is not deflate immediately after Yokkaichi news disclosure. We believe the price will slightly deflate by April and May. Not now. This YoY growth, just because last year actually we announced we are gaining a lot of design win in the systems, which we name is embedded ODM, which cover PC computing, mobile, a lot of communication equipment, which we made a lot of design win. The price, if talking about the Yokkaichi contamination, still not any influence to my February business. That will start to deflate by April. This is everything coming from our design win project.
We already know we're able to get a good Q1 this year, but little bit surprise to me because February working days is less, only like 60% of January. Anyway, this is good sign. We believe when time going to the April, May and June, when market start feel they have a gap in supply, then the price up may also helping us to gain our revenue and the profit.
That means maybe second quarter sequential revenue profit improvement will be quite strong then if
I believe so.
Everything.
I believe so.
Sorry for the little bit confusion, is that overall, you know, last night, Western Digital confirmed normalized the fab operation. That means about only the one-month-long disruption. Any rough idea, sir, what's the overall global impact? Western Digital, KIOXIA together, is around, maybe what percentage of impact? 3%, 5% for the entire year? Any rough idea. They mentioned about initially 6.5 EB, but they raised a little bit to 7 EB. The overall global impact, including the KIOXIA, maybe around 14 EB, 15 EB . Any rough idea of the global impact based on their public announcement?
Again, you know I'm not analyst, right? I'm just running the business, just making money for company, okay? I use this trust simply to answer you. Actually, I don't care about impact whole year. We care about the gap is happening by this period. I think you agree, right? The supply, the gap in supply will happen by the end of May and June, maybe early July. The gap will be here. If they have whatever, 15 EB or 18 EB or 20 EB, I don't know, the supply gap in this period, the market may go crazy.
Mm.
Yeah.
Mm. Mm.
I don't care about whole year. I don't care about this month.
No. Yeah. However, you have inventory, and you have sourcing from the U.S. chipmaker, Korean chipmaker. If the June, July industry shows meaningful shortage, maybe Phison, you know, can easily sell your inventory and also you can, you know, redistribute the NAND product based on the, you know, Korean or U.S. NAND chip. There are no issue there for you.
I think the answer is yes, but probably the answer is no. When this period, the market is a real big gap there, right? We believe a lot of system makers may come to us to call for help. I believe, even though I have today's inventory, still may not be enough at that period. I'm still accumulating my inventory at this moment.
Yep. Okay. Very clear, sir. Lastly, sorry, I missed your slide. Could you recap your revenue mix for maybe 2021 or fourth quarter? I missed overall the-
Yes.
Oh, so this seems to be pretty much in line with the, you know, recent trend. Any particular, you know, change in the mix? Controller always look to be 20%. Industrial a little bit up. Any particular. Sorry for maybe I missed your.
Yeah. That's fair.
Presentation.
Actually, controller was around 20% in the last few years, but now we migrate to the 25%. Potentially, I believe by Q1, we may able to go to 27%-28%. Two reasons. We get a more wafer supply. Second, we get the more project from the semiconductor by 2020 and 2021 start to ramping up.
Mm-hmm.
Yeah.
You don't worry about the UMC's full utilization ratio, and also they may raise the price again, your foundry sourcing costs. They may hit your margin or limit the growth.
Okay. Now the market have two voices. One voice saying that, "They're still tight, so raising price." The other side say, "Oh, it's going to empty." Okay? I don't know who's right, who's wrong. Even I worry here is not able to help me solve problems. If they raise price, okay, give me more allocations. The reason is my customers still asking the more supply, so I have no choice. Yeah.
Yeah. Yeah. Okay. Very clear, sir. Appreciate.
Thank you.
Congrats on the results. Yeah. Thank you.
Thank you.
Ladies and gentlemen, if you have any question please press the Raise Hand button on the menu bar below. Okay, there are two question from me. First one is, for the foundry supply, just want to have a longer-term sense. Will the supply issue be more resolved in the next year given more foundry going online? Or you still think that the supply will still be tight and there will still be gap for the next year?
Okay. Actually, we've been informed from both TSMC, UMC, next year is still tight. Next year is still under allocations. I hope this is not true. I hope. The reason is you can see, Phison, we invest so many R&D in the new project design. When controller is ready, we wish we are able to ramping up the quantity, right? But we invest in the early stage, but eventually not able to get good enough wafer. We are not able to get our ROI. In my mind, my best wish is foundry going to release. I hope so, but unfortunately, until today, they keep saying 2023 still under big allocation. I don't know who's right, who's wrong. But I'm Phison actually we are in a very good position in the storage industry, and both TSMC, UMC agree, Phison we are very delicate position.
They are trying to help, but I wish they're able to help and give us more supply.
Okay. Thank you. That's very clear. My second question is about. It seems that Phison is having more design win recently. Just wondering if it is because those leading NAND maker is increasing their outsourcing ratio. Do you expect this kind of outsourcing trend to continue, or is there any other reason to trigger this more design win? Thank you.
Okay. I believe a NAND manufacturer now their most focus is into the data center enterprise SSD, which able to help them to consume more petabyte and to get the more profit. They need their internal controller team to develop solution for enterprise data center, not client SSD. Phison, we're able to offer very good in cost performance plus R&D NRE fee, which attract them. They outsource project to us. Actually, they gain extra return instead of they use internal team. They can focus more in the data center. We are trying helping them in the client. It's a win-win to the both parties. Overall, I believe the outsourcing is keep happening. Phison, after we get the outsourcing project from them, we're able to gain the so-called unit business, as I show you here. Okay?
We gain the unit business. It's good to us. Where is the chart? Okay, unit.
Chart.
Let me show you this. Okay. We get the unit business here. It's good to our gross margin rate. On the other hand, when we design the controller for them, means our module is done. Okay? The design of module is done. On the other hand, we buy back the flash from them when slow season, we're helping them. We build the modules, we gain the extra SP. This is one of the so-called win-win model between Phison and the NAND manufacturer. I expect, and I can foresee that Phison able to get the more project in the coming futures.
Okay. Understood. That's very clear. Our next question came from Brittany Lin. Brittany, please go ahead.
Hi there. Thank you very much for the call and the update. I want to follow up a little bit on the, I guess, 1Q and 2Q. 'Cause you mentioned earlier that not only would the revenue be higher from the SSD controller, but it's also a higher GP mix, higher GP product itself. In that sense, would both the revenue and GP margin be higher, I guess, heading into the rest of the year?
Yeah, good questions. Okay. Revenue-wise, to be honest, when we look at this January, February, right? Phison's all-time high is, I think, TWD 17 billion in the last year CQ3. These two months we already hit TWD 10 billion. To break the record looks like not so difficult, to be honest. CQ1, again, is a slow season in this industry, right? The biggest growth may happen by CQ2 and CQ3. CQ2 because they have a supply gap by the end of May and June. This is how Phison we're able to, you know, use our strategy, our strength to build inventory and to gain more supply, more business and to help the fulfillment to our customers.
Q1 I believe we are good. Q2 will be better. Q3, I believe will be the best.
Wow. That sounds like you'll be breaking record every quarter this year.
I hope so. I wish no more accident, okay? No more earthquake, no more war, no more power outage. Yeah.
Understood. Last one is, 'cause one of your slides was your strategy to focus on revenue growth instead of just GP margin hitting target, right? In that case, given there's still the backdrop of better product mix and, you know, all the disruption causing net prices higher, I guess I'm trying to understand what's your strategy then. Would it be, you know, lowering prices to gain scale or what is it actually?
First half this year, I think it's not necessary to lower the price. No matter in the controllers or in the modules. Okay? NAND is tight. The foundry is tight. Okay? But when look to this, right, controller is helping me to gain our gross margin rate, GM rate by percentage. We are good. I believe by dollar amount in controllers, in Q1, Q2, definitely we are growing. Because of more projects ongoing, ramped up, and the more wafer supply. Talking about revenue-wise, I believe, embedded ODM and gaming were helping us a lot in revenue. Second half this year, Phison will start to launch our enterprise products. Okay? We are cooperating with one of the key partners. I hope we're able to announce it by end of March.
By middle of April, Phison will host a so-called technology day to disclose as planned what's our enterprise strategy. If that happened on time, enterprise SSD and the solution is able to help Phison to gain more revenue. Okay? Also making Phison in a better position in the NAND industry. I don't see this as a must to lower the price in the first half of this year.
I am curious. With this enterprise SSD, what kind of, I guess, GP margin would it be?
Good question. Okay. If talking about the drive itself, to be honest, would be like between 10%-20%. The reason is, 8 TB, 16 TB, the NAND cost in the full drive is, 98%-99%. This is our first product going to the market. I care is the recognition, approval by the customers. Second step, Phison is going to make the design service, NRE-based to the customers. They're able to helping growing our gross margin rate, because NRE is a 100% gross margin. Yeah.
When do you usually expect it to come, the design service?
I believe by Q4 this year, Q1 next year, we are able to engage for design service opportunity. First of all, we need to show we are capable to make the products to the market.
Got it. Thank you so much.
You're welcome.
Okay. Our next question comes from Simon Wu. Simon, please go ahead.
Oh, yeah. Thank you very much again. Number one, you know, the PCIe next generation, when do you expect meaningful production for client SSD, and then maybe your long-term target for enterprise solutions? Thank you.
Again, to be very honest, I don't.
To be very honest.
Yes.
I-
Okay. Personally, I don't believe PCIe Gen 5 is going to popular in client by 2022 or 2023. The reason is the power consumption and also the thermal issue is a big hurdle to the system makers. We believe that PCIe Gen 5, first, going to popular is in the new high-end data center. Gen 5 penetration to the client-
Gen 5
I believe will happen by 2024-2025. Okay?
So 2024 , 2025
Yes.
For Gen 5.
2024, 2025.
2025.
Yeah.
How about the 2022 and 2023 you were saying?
Gen 5 will be the Gen 4. Majority will be Gen 4.
The Gen 4.
Yeah.
However, your enterprise solution exposure is still minimal, right?
Yep. That's why we are targeting the Gen 5 into the data center enterprise.
Yeah. For 2024 and 2025.
Yes.
Yeah. Very quickly, sir. For 2021, how many times have you accepted the foundry, you know, price increase from the factory?
Oh. 3x, 4x. I believe 4 x.
4 x. That means almost every quarter.
Yes.
You pay the high price then.
Yes. Yes.
That means maybe for 2022, every quarter you have to negotiate with foundry sources.
2022, we still don't know how their strategy yet, but I believe, if foundry increase price, Phison may have a better treatment from them. The reason is that Phison also made a lot of contributions to them in the 2021.
Yeah. Your new partner, YMTC, are they actively using your controller or are you just to get the NAND from YMTC and then you make your own SSD product, putting the YMTC NAND on your own controller? Do we get number one, YMTC NAND chip volume is big, large. Is that how you do the business with the YMTC?
Personally, I believe Phison is their biggest customer in the NAND processing. I also believe in YMTC controllers, Phison is the biggest supplier.
Phison supplies pure NAND controller chip to YMTC. That's it. It's a one-way transaction.
Yes.
In that case, here the pie chart, 25% of your revenue in Q4 is controller.
Yes. Only controllers.
Okay. Only controller. This is, however, this 25%, mostly though for Phison's own product rather than-
No.
pure controller.
Phison controller only, a few percent here.
Oh, I see. More than 90% of, you know, 25% pure controller sales.
Yes.
For the external sales.
85%. 85%-90% are pure controller sales.
I see. Like, as Silicon Motion does.
Yes.
I see. Yeah. Very, very clear then. Thank you very much.
Yeah. You're welcome.
Okay. We got one question from the chat room. It's also about the Gen5. The investor wants to know about the Gen 5 progress for the Redriver and SSD controller and Retimer. The investor wants to know about that in terms of a Gen5 Redriver, is the company already competing with other peers, like ASMedia? Thank you.
I think PCIe Gen 5 Redriver, Phison is quite in the leading position in this industry. What I read from my people, we are competing with the TI. I didn't see local Taiwan design house, they have a PCIe Gen 5 Redriver yet. We already start MP these products to the server and the motherboard business. Good business, but revenue is relatively small, much smaller. I don't see this as a kind of my cash cow, but I think this is a strategic business. The reason is, by second half this year, we are going to penetrate to the data center SSD business. If data center motherboard using our Redriver, this also will improve Phison influence power inside the industry. I don't see we are competing with any other else because we have no any intention to compete.
This is just our business strategy.
Okay. Thank you. That's very clear. I think that due to time constraint, it's not allowed to take another question, so we have to close the meeting right here. Thanks Mr. Pua for his effort. Thank you all for your participation. If you have any further question, please feel free to contact Phison's IR team directly. This concludes the meeting today. Have a nice weekend. Thank you all.
Thank you.